Gas cap altered Tesoro's plans

The CEO says plans for refinery upgrades were scuttled and supplies were diverted

Uncertainty about gasoline prices under the state's wholesale price cap prompted Tesoro Corp. to cancel some investments at its oil refinery on Oahu, the company's president said.

Tesoro President and Chief Executive Officer Bruce Smith also said there was a time during the nine months of price regulation that he was forced to export some gasoline supplies, which the refiner does not normally do.

"There was a time when the gas cap actually did impact supply here and I moved gasoline to the Pacific Northwest," Smith said yesterday in a meeting with the Star-Bulletin's editorial board. "I told the governor this is a bad law. ... If prices are going to run up, I've got investors and I've got shareholders, and I'll have to move gasoline off the island because it will be limited in the amount that I can sell."

Lawmakers passed a suspension of the price cap this year that gives the governor the power to reinstate them. Gov. Linda Lingle signed the suspension May 5, and said it was unlikely she would ever bring them back.

A Star-Bulletin analysis showed that prices in May could have been about 10 cents a gallon cheaper if the cap had remained in place.

Smith said uncertainty over whether the price cap would allow for a reasonable return on capital investments scuttled upgrades that were planned for the refinery last year.

"I did not know whether it was going to pay out or not," he said.

He declined to disclose the proposed costs, but said the upgrades were "not significant."

"They were small," he said. "We're going to take a look at them again now with the changes that have occurred here. They are more in the fine tuning (of the refining process) to be able to bring a little bit more conversion."

The refinery currently is able to process about 95,000 barrels* of crude oil a day.

Critics have noted that gasoline prices have remained consistently high since the suspension of the price caps, alleging that oil companies have been able to maintain artificially high prices.

The statewide average for regular unleaded was $3.38 a gallon yesterday, about 41 cents higher than the national average, according to AAA's Fuel Gauge Report.

Smith noted that prices are high everywhere because of high crude oil prices, which closed just above $74 a barrel yesterday. He also cited Hawaii's high taxes and the costs of importing ethanol as reasons behind the island's higher prices.

Tesoro and Chevron, the state's other oil refiner, have had to import ethanol to meet blending mandates that began in April. Nationwide demand for ethanol has driven prices to record levels of near $4 a gallon.

"We're importing $4 ethanol and blending it with $3 gasoline," Smith said. "You're getting a higher price of gasoline because we have to import higher priced ethanol."

Smith said he is in Hawaii to meet with some of the company's 600 employees and address some of their concerns about rising gas prices. The company plans to unveil new promotional materials today addressing the costs of gasoline.

"It's primarily about trying to empower them a little bit more to be aware of the issues," Smith said, "not just the emotional issues of high gasoline prices, but really the factual issues so they can do a little bit better job of being an advocate and not feel bad about working for the company.